HERMANN: Tempting economic Armageddon

RICHARD HERMANN

Friday

May 27, 2011 at 12:01 AMMay 27, 2011 at 10:39 AM

In July 1945, the first atomic bomb was ready for testing at the Trinity site in New Mexico. The 1,000-plus physicists working on the Manhattan Project at Los Alamos were in the midst of a spirited debate about what would happen when the bomb went off. Bets were taken among them as to whether the atmosphere would catch fire and destroy all life on earth. Whether the losers would have been around to pay off was presumably not discussed.

In July 1945, the first atomic bomb was ready for testing at the Trinity site in New Mexico. The 1,000-plus physicists working on the Manhattan Project at Los Alamos were in the midst of a spirited debate about what would happen when the bomb went off. Bets were taken among them as to whether the atmosphere would catch fire and destroy all life on earth. Whether the losers would have been around to pay off was presumably not discussed.

However, project chief Robert Oppenheimer, relying on the expert opinions of his theoretical physicist inner circle that destruction would be localized, decided that the war in the Pacific and the opportunity to save millions of American and Japanese lives necessitated going ahead with the test. Fortunately, the physicists were right, and humanity survived.

A similar pervasive destruction, figuratively speaking, is being dared now. Speaker of the House John Boehner is tempting Armageddon in return for a House vote to raise the national debt ceiling. The statutory debt ceiling has been approached many times in our history — especially our recent history — and every time Congress has voted to raise it without a lot of hoopla. Not doing so now would be a huge risk fraught with uncertainty.

Unfortunately, Boehner cannot rely on today’s equivalent of the brilliant stable of advisors that counseled Oppenheimer.

If the debt ceiling is not raised, it could mean that the United States defaults on its debts to its bondholders, domestic and foreign. That would severely shake the confidence of every financial market in the United States and abroad. Interest rates would likely rise; inflation would not be far behind. We really do not know what additional consequences might result, except to say that, while not destroying all life on Earth, they could certainly destroy the global economy and make the Great Recession look like a warm-up act.

The vast majority of economists and financial experts say that refusing to raise the debt limit might (1) cause the stock market to go into free-fall, decimating retirement plans, (2) plunge the United States back into a severe recession, and/or (3) cause unemployment to surge back up into double digits. The nonpartisan Congressional Research Service says that for the government to avoid default, it would either have to cut spending or raise taxes by $758 billion over just the next four-and-a-half months, then by much more in fiscal year 2012 in order to continue to function. But even those draconian actions would shake lender confidence and have adverse consequences for the economy that would be felt by every member of society.

Does Boehner really want to take that risk and plunge us into the Great Unknown?

Even permitting this debate about raising the debt ceiling to drag on for so long without a resolution is already causing major financial institutions to gird themselves for calamity, which will mean tighter credit, rising mortgage rates, plummeting housing prices and more overall economic angst for all Americans.

You would hope that congressional leaders are responsible enough not to risk sailing into such dangerous, uncharted waters. Unfortunately, it appears that they are not. Einstein said, “God does not play dice with the universe.” Men, however, apparently have no such misgivings.